How Covid-19Affects Investment Strategy

January 30, 2020 | Victor Lye, CFA CFP® & Yi-Chen Chia, CFA CAIA FRM

The Year of the Rat has rocked the world with Chinese New Year “GONG XI FA CAI” greetings and worry
about the Covid-19 outbreak. Should we panic or carry on as we do just like the seasonal flu we live with every
year?

By end-Jan, China officially reported over 8,000 confirmed cases and over 180 deaths. The lockdown of
Wuhan and other parts of China combined with travel restrictions are unprecedented. So far, there appears
to be some containment with several countries reporting confirmed cases, but in smaller numbers. Many
countries are advising against travel to China.

The rapid spread of the Covid-19 from the epicenter in Wuhan city to every region in China shows it is
highly contagious. It also reflects the mass travel patterns during the annual Spring Festival. As with any flu
outbreak, there will likely be an acceleration in the number of infections before it peaks and slows down. In
the meantime, stay away from high-risk areas, practice good personal hygiene and use common sense.
Wearing a mask is not sufficient nor adequate. Nonetheless, sick people should wear a mask to reduce the
risk of infecting others. But what about our investments?

Sector Impact

The obvious beneficiaries will be sectors such as Pharmacy, Medical Equipment and Medical Supplies such as
masks, medicine and detection reagents. What do people do when indoors or quarantined? Online gaming,
home entertainment and e-commerce will be in demand. However, many industries will suffer badly.
Transportation, hospitality and travel will see revenues plummet. Energy prices may fall with reduced
demand. With China in lockdown, South East Asia will feel the pain. In 2019 data, South East Asia was the most
popular destination for Chinese tourists. There will be multiplier effects across domestic industries that support
the travel and tourism sectors in each Southeast Asian country.

Asset Allocation

The Covid-19 may hog the headlines, but the US-China Trade War is still a major dampener. While the
US-China Phase 1 trade deal is a welcome relief for China, we also note that China cannot weaken the Yuan
indefinitely. Hence, SquirrelSave portfolio reduced exposure to China in late Dec 2019 – even as the Covid-19 situation gained attention. SquirrelSave has shifted towards the US and developed markets focused on
yield generating investments such as REITs and Bonds – while watching the USD-SGD FX movements. Cash
level is healthy to protect recent gains.

The Covid-19 outbreak cannot overshadow data analytics. The US Non-Farm Payroll dropped to 145K from 256K
over the previous month, suggesting the Fed may keep easing monetary policy. We think China will have to
stimulate growth – even more so with the impact of the Covid-19 outbreak. Hence, our SquirrelSave AI
Classification model is predicting a Bull market scenario – for which we show the risk-return optimized
allocation weights for the Aggressive risk profile.

At SquirrelSave, our algorithms have been trained with 15 years of data and tested with 3 years of validation
through real-time market experience. Even with sudden market impact events such as the Covid-19 outbreak,
SquirrelSave continues to look forward with no human bias and knee-jerk reactions – based on data and
time horizon relevant to your risk-reward profile.

Stay calm and practice good hygiene, even with your SquirrelSave investments!